Ballmer Exit Leaves Microsoft Searching for Hero in Slump

Aug. 24 (Bloomberg) -- Microsoft Corp. Chief Executive
Officer Steve Ballmer’s retirement leaves the world’s largest
software company in a succession crisis amid the worst slump in
history for the personal-computer industry it helped create.

The search committee will consider internal and external
candidates to replace Ballmer, 57, who will depart within the
next 12 months, the company said in a statement yesterday. Tony
Bates, Satya Nadella, Qi Lu and Terry Myerson are the leading
choices among Microsoft’s executives, according to people with
knowledge of the matter, who asked not to be identified because
the process isn’t public.

Ballmer’s planned departure follows a management revamp,
the company’s biggest earnings disappointment in a decade and
the fifth-consecutive quarterly drop in PC shipments. Meanwhile,
Microsoft remains an outsider in a burgeoning mobile-computing
market led by Apple Inc. and Google Inc.

“It would be a difficult job, but if you could turn around
Microsoft you’d be seen as a hero,” said Brendan Barnicle, an
analyst at Pacific Crest Securities LLC in Portland, Oregon. He
has the equivalent of a hold rating on the stock. “He’s not
really leaving the company in the best financial position.”

Shares of Redmond, Washington-based Microsoft rose 7.3
percent to $34.75 at the close in New York yesterday, for its
biggest gain since April 2009. The stock is up 30 percent this
year and is still trading below its price at the end of 2007.

Reducing Units

Bates, a former Cisco Systems Inc. executive, joined
Microsoft in the 2011 acquisition of Skype Technologies SA and
now leads the company’s business-development organization.

As executive vice president, Nadella runs the company’s
cloud and enterprise business. He joined Microsoft in 1992 from
Sun Microsystems Inc. Lu came to Microsoft from Yahoo! Inc. in
2008 and oversees the company’s applications and services group,
which develops products such as Office, Office 365 and
SharePoint.

Last month, Microsoft reduced the number of business units
to four and gave Myerson, the head of Windows Phone software,
the added responsibility for the Windows and Xbox operating
systems. Myerson has been at the company since it bought his
startup, Interse Corp., in 1997.

Outside Options

“Long term, they have a big problem,” said Dan Niles,
portfolio manager at Alphaone Capital Partners LLC in Tiburon,
California. “They are moving from a market where they have
monopoly profits to a brutally competitive market of services
and devices.”

Frank Shaw, a spokesman for Microsoft, said the company
isn’t making any executives available for comment.

“There’s not a clear internal successor, as some of the
potential successors have left in recent years,” said David
Cearley, an analyst at Gartner Inc. in Stamford, Connecticut.
“It’ll be difficult for an outsider to come in and change a
very strong culture that exists at Microsoft.”

Steven Sinofsky, former head of the Windows division, left
the company last year after clashes with executives including
Ballmer, people familiar with the situation said at the time.
Gates is not being considered, according to people with
knowledge of the matter.

Fresh Blood

Microsoft’s board should look outside the company to
replace Ballmer, said Bill George, a former CEO of Medtronic
Inc. and now a director at Exxon Mobil Corp. and Goldman Sachs
Group Inc.

“They need fresh blood from the outside, someone from the
technology world who’s innovative, creative and willing to take
them in new directions,” said George, who’s also a management
professor at Harvard Business School. “Microsoft in recent
years has missed mobile, search and all of social media, which
is why I don’t think they should choose from inside.”

Whoever gets the job will face a list of challenges that
recently has grown longer. Last month the company reported
profit that missed analysts’ estimates by the biggest margin in
at least a decade amid weakening demand for PCs running its
Windows software.

Surface Writedown

Microsoft’s attempt to crack the growing market for tablet
computers with the Surface device led to a $900 million
writedown of inventory as consumers continued to buy rival
products like Apple’s iPad. Surface, Microsoft’s first-ever
homegrown computer, shipped just 900,000 units in each of the
December and March quarters, according to IDC.

At the same time, Microsoft’s flagship business is
struggling. PC shipments fell 11 percent last quarter, according
to Framingham, Massachusetts-based IDC.

For some investors, the most important thing is replacing
Ballmer with a leader who will help the company reemerge as a
technology pioneer rather than just a follower.

“You need someone who doesn’t need to be as much of an
operations person as Steve Ballmer, who can say where Microsoft
needs to be five years from now,” said Microsoft investor
Michael Obuchowski, a fund manager at North Shore Asset
Management LLC in Cold Spring Harbor, New York.